January 5, 2010

China – handle with care

The fact that Mr Shaikh was the first European to be executed in China for half a century shows that, until now, China has often allowed foreigners to remain outside the law as it sought to curry favour with more powerful nations. But no longer.

It may be 170 years since Britain subjected China to colonial humiliation during the Opium wars, but the memory of red-faced foreigners banging their fists on tables and telling the Chinese what to do is still keenly felt. Despite its apparent strength, the country remains incredibly sensitive to the way it is treated by foreign governments.

As it takes the rotating presidency of the United Nations Security Council this month, it is easy to forget that the country was a global pariah just two decades ago. After the massacre at Tiananmen Square, foreign governments cut off diplomatic ties with Beijing, imposed sanctions and snuffed out the early flickerings of the attempt to rejoin the world after decades of Maoist isolation.

Under Deng Xiaoping’s leadership, China had been opening up. The country’s unspoken support for the US had spurred the collapse of the Soviet Union. “China and the US had been sharing both geopolitical and military secrets,” recalls Gao Zhikai, Deng’s former translator. “Because of that co-operation, China was following a US line.” The US had even been selling China weapons, both Sikorsky helicopters and guidance systems for jet aircraft.

The events of 1989, however, turned China into a new target for the US as it searched for an ideological enemy in the post Cold War era, even if, in practice, Chinese communism was a world away from Soviet Marxism.

“Until the September 11 attacks in 2001, it was a very sensitive, difficult and uncertain time for China,” said Mr Gao. “There was no eagerness to rebuild a relationship or treat China as a partner, and there were no summit meetings until Jiang Zemin met Bill Clinton in Seattle in 1993.” After 2001, of course, the US found a new ideological enemy in Islamic terrorism, and China was a willing partner in the fight.

The Chinese public, for its part, hardened against the West after the Chinese embassy in Belgrade was bombed by Nato planes in 1999. A skilful propaganda campaign convinced the population that the West was up to its old tricks and seeking to contain the rise of a potential new superpower.

The Chinese leadership genuinely believes this. Hu Jintao, the Chinese president, has warned that the US has strengthened its relationships with Vietnam, India and Taiwan in order to “put pressure points on us from the east, south and west”. More Chinese outrage followed at the protests against the Olympic torch in Paris. The sabotage was seen as a deliberate attempt to ruin China’s big moment, the Beijing Olympics.

Regular bouts of hectoring from the US and the UK over human-rights abuses, the irresponsibility of China’s position at Copenhagen, or the execution of Akmal Shaikh have merely confirmed the suspicion that the West believes it can boss China around.

China is now well placed to be the world’s next superpower. Its admission to the World Trade Organisation in 2000 launched a decade of frantic trading that has seen its gross domestic product rise from below that of Spain and Italy to overtake Japan’s, making it the world’s second-largest economy. By 2027, according to Goldman Sachs, it will overtake the US and become the largest.

More than 250 million people have been lifted out of poverty in just three decades and a sprawling middle class has emerged. China is the world’s largest car market, and rich Chinese bought £6 billion of luxury goods this year, a 12 per cent rise as the rest of the world slumped. One of last year’s biggest catchphrases was: “Money is not a problem,” mocking the country’s vulgar nouveau riche for flaunting their wealth.

While the world debates the future of its financial system, global rebalancing or even power shifts along five dimensions are quietly taking place. Their implications are profound and may well lead to a more stable world.

The first is a rebalancing of moral authority. The system that the west touted as superior has failed. Why should developing countries blindly follow its model now? Remember the moral high ground that western leaders took during the Asian financial crisis? Hong Kong was bashed when its government intervened in August 1998 in the stock market to fend off the western investment banks and hedge funds bent on destroying the city’s currency.

Yet only a month later, the US government intervened in the market to bail out Long-Term Capital Management, a move that proved to be the harbinger of the western bail-outs of financial institutions in the past year. Hong Kong’s government was not allowed to save its citizens, yet by a double-standard the US could save its companies.

The waning of the west’s moral authority is also due to the many conflicts of interest inherent in investment banking as it is currently structured. The west turned a blind eye to them. What can developing economies do? Nothing, for the wealthy countries dictated the rules of the game, which became a licence to misbehave.

The moral superiority of the west was also expressed through its ideology. China was barred from being a member of the Group of Eight leading nations, presumably owing to its lack of western-style democracy. Now some in America are advocating a G2 with only the US and China. If the focus shifts to the G2 to make decisions, then what happens to democracy? The west has a moral dilemma.

So which region will now occupy the moral high ground? Certainly not the developing east, for its social institutions are pathetic. But given the moral retreat of the west, the two sides are now on an equal footing. The preaching by the west must stop.

The second rebalancing has to do with decision-making in global economic affairs. The west can no longer dominate, given its partial loss of moral authority. For the first time in centuries, the developing east has some say. Global economic power will be more diffused. Symbolic of this new reality is the minor adjustment in voting rights in the World Bank and International Monetary Fund.

Before 1800 the east dominated the world economically – China and India together accounted for 50 per cent of global gross domestic product. Then the west surged ahead. The world has never seen a time of relative balance between east and west. That time is approaching as global influence follows wealth accumulation.

The third is the shift in the centre of economic gravity from the Atlantic to the Pacific. The earlier rise of Japan alone was insufficient to achieve this. China’s size and growth momentum finally shifted the balance. The financial crisis hastened this shift as China performed better than other countries. It was hurt less and its government responded more decisively. Now China is the biggest holder of US government debt ; it has the world’s largest foreign reserves; its economy ranks third globally; it exports more than all countries except Germany and three of the world’s five biggest banks are Chinese. Although the 21st century may not be the Asian century, it will centre on the Pacific.

The fourth rebalancing is the movement away from a total dependence on the US dollar as the global trading currency. The dollar will remain by far the dominant international reserve currency for decades. However, America’s apparent financial irresponsibility worries many investors. Consequently, certain trades will increasingly be conducted in bilateral currencies. Over time some countries will keep more renminbi, making it more like a reserve currency.

The last shift is hardly acknowledged: most developed economies, with the exception of the US, will move from seeking ever higher growth to trying to maintain it. The crisis shows that blindly seeking growth is dangerous. For many wealthy countries, it is also unrealistic. Take Japan. By 2025, it will have shrunk from 127m people to 120m. A similar situation exists across the European Union. Given those population declines, just maintaining the same level of GDP will be an achievement. Short of massive immigration, which is unlikely, growth can only come from technological breakthroughs and deregulation. Again looking at Japan, it is already a world leader in the former but could do more to deregulate, for example, by introducing housing reform. But even that would hardly be sufficient to sustain overall growth. That economies should expand continually is a legacy of the post second world war era. We need a new paradigm to assess our economy.

These five shifts are for the most part desirable. They bring about a more balanced and stable world. The west must acclimatise to the new global reality – it will not be as dominant as it was in the past. Then together we should ask the question: how can we make this new world order better and safer?